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CWS: November 2018 Portfolio Manager Review

Performance data quoted represents past performance and is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than original cost. Returns less than one year are not annualized. For the fund’s most recent standardized and month-end performance, please click www.advisorshares.com/fund/cws.

Performance Review

November was nearly as good for us as October was painful. Some of it, naturally, was a reaction to all the selling in October, but the market also had good news. For one, it looks like the Trade War may not be as contentious as feared. Also, the economy continues to look pretty good. Not great, but good.

The most promising news is that the Federal Reserve appears to be walking back some of its hawkish rhetoric that we heard in early October. It looks like the market is gradually realizing that the Fed won’t be able to raise interest rates three times next year. This is good news for us.

Let’s look at some numbers. For November, the S&P 500 gained 1.79%. Including dividends, the index gained 2.04%. Our ETF, the AdvisorShares Focused Equity ETF (NYSE Arca: CWS), jumped 6.27% in November, while the Net Asset Value rose 4.37%.

Let’s look at what helped make November such a good month for CWS.

In October, Wabtec (WAB) was a big loser for us. I’m happy to say that the shares recovered very nicely in November. But the most important news was that shareholders approved the combination with GE Transportation. At the meeting, 99% of shares were cast in favor of the deal. That’s nice to see. The GE deal is expected to close in early 2019.

On the morning of Halloween, Wabtec said it had made 95 cents per share for Q3, which matched estimates. Wabtec said it now expects full-year 2018 earnings of $3.85 per share, which excludes merger costs. The company is aiming for a 13% operating margin and $200 million in cash flow. The CEO said he expects a strong Q4 and that the freight business continues to show strong growth. For the month, shares of Wabtec gained over 15%.

Signature Bank (SBNY) also had a strong November. It was our second-best performer for the month. Again, that comes after a rough time before. In October, the New York bank reported Q3 earnings of $2.84 per share. That’s up from $2.29 per share from last year. Signature also beat Wall Street’s estimate by one penny per share. Total deposits are up 7.2% so far this year to $36.09 billion. Loans are up 12.6% to $35.13 billion. For Q3, net interest margin was 2.88%. This is a good example of a stock that’s recovering along with the economy. I expect more good news from Signature Bank. The bank was a 12% winner for us in November.

Church & Dwight (CHD) may be the quintessential consumer-staples stock, and that probably helped a lot in November, when investors were seeking out security. At the beginning of the month, C&D reported Q3 earnings of 58 cents per share. That beat estimates by four cents per share. Net sales rose 7.2% to $1.04 billion.

Consumer Domestic, which is CHD’s largest unit, saw net sales growth of 7.6%. Business growth was led by Arm & Hammer. I was pleased to see the company raise its estimate for full-year organic revenue growth from 3.5% to 4.0%

For Q4, CHD expects earnings of 57 cents per share, which makes the full-year total $2.27 per share. The stock jumped over 9% after the earnings report. For the month of November, the stock gained just over 11% for us. I’m glad to see this one do well for us.

I also wanted to say a few works about Danaher (DHR). In October, the diversified manufacturer reported Q3 earnings of $1.10 per share. That was a 10% increase over last year. Core revenues rose 6.5%. The company had told us to expect Q3 earnings to range between $1.05 and $1.08 per share.

For Q4, Danaher expects earnings between $1.25 and $1.28 per share. The company also increased its full-year guidance. The old range was $4.43 to $4.50 per share. The new range is $4.49 to $4.52 per share. I was particularly pleased to see Danaher’s operating margins expand to 17.1% from 16.8% a year ago. While the shares got punished after the earnings report, the stock rose again once the short-term players moved on. During November, Danaher gained 10% for us.

Not everything did well for us in November. Our worst performer was Ross Stores (ROST), which is odd to see, considering the deep-discounter has done so well for us for so long. The stock got absolutely clobbered during November. At one point, Ross fell for ten days in a row.

Despite that, on Tuesday, November 20, Ross Stores reported fiscal Q3 earnings of 91 cents per share. Sales rose 7% to $3.5 billion. The important metric for us, same-store sales, rose by 3%. Going into this quarter, Ross told us to expect earnings between 84 and 88 cents per share and same-store sales growth of 1% to 2%. Wall Street had been expecting 90 cents per share.

For Q4, which is the all-important holiday quarter, Ross projects same-store sales growth of 1% to 2%. They also see EPS ranging between $1.09 and $1.14 per share. That’s the same as the previous guidance, but it now includes a gain of seven cents per share due to the resolution of a tax matter.

For the entire year, Ross sees earnings of $4.15 to $4.20 per share. In the earnings report, Barbara Rentler, the CEO, sounded cautious: “As we enter this year’s holiday season, not only are we up against our toughest sales comparisons from 2017, but we are also expecting another fiercely competitive retail environment.”

This is basically what I expected. Their Q3 guidance was low, but that’s what they often do. I expect to see Ross rebound over the coming weeks and months.

Portfolio Attribution

Here’s how all 25 positions performed during the month of November:

Company

Symbol

31-Oct

30-Nov

Gain/Loss

Wabtec

WAB

$82.02

$94.60

15.34%

Signature Bank

SBNY

$109.90

$123.33

12.22%

Church & Dwight

CHD

$59.37

$66.19

11.49%

Danaher

DHR

$99.40

$109.54

10.20%

Becton, Dickinson

BDX

$230.50

$252.75

9.65%

Moody’s

MCO

$145.48

$159.07

9.34%

Stryker

SYK

$162.22

$175.46

8.16%

Snap-on

SNA

$153.94

$166.24

7.99%

RPM International

RPM

$61.17

$65.95

7.81%

Sherwin-Williams

SHW

$393.47

$424.07

7.78%

AFLAC

AFL

$43.07

$45.74

6.20%

Intercont Exchange

ICE

$77.04

$81.72

6.07%

FactSet Research Sys

FDS

$223.76

$234.49

4.80%

Hormel Foods

HRL

$43.64

$45.09

3.32%

Ingredion

INGR

$101.18

$104.46

3.24%

Cognizant Technology

CTSH

$69.03

$71.23

3.19%

Continent Building Pr

CBPX

$27.81

$28.58

2.77%

Torchmark

TMK

$84.66

$86.41

2.07%

Cerner

CERN

$57.28

$57.91

1.10%

Check Point Software

CHKP

$111.00

$111.81

0.73%

Fiserv

FISV

$79.30

$79.13

-0.21%

Alliance Data Systems

ADS

$206.18

$200.36

-2.82%

JM Smucker

SJM

$108.32

$104.51

-3.52%

Carriage Services

CSV

$19.06

$17.04

-10.60%

Ross Stores

ROST

$99.00

$87.60

-11.52%

Source: Yahoo Finance

Portfolio Changes

The philosophy of the AdvisorShares Focused Equity ETF is to make portfolio changes just once a year. At the end of the year, we add five stocks and delete five. We made our changes in December, so there were no changes to make in November.

Top 10 Holdings

Here are the ETF’s top ten holdings as of November 30, 2018:

Company

Symbol

Weighting

Church & Dwight

CHD

5.07%

Hormel Foods

HRL

4.72%

RPM International

RPM

4.72%

Fiserv

FISV

4.61%

FactSet Research

FDS

4.60%

Danaher

DHR

4.49%

Intercontinental Ex

ICE

4.44%

Becton, Dickinson

BDX

4.42%

Wabtec

WAB

4.39%

Stryker

SYK

4.27%

Management Fee

In a first for the ETF industry, the portfolio manager of CWS has “skin in the game.” The manager’s compensation is directly tied to portfolio’s performance. Using the trailing 12-month returns of CWS vs. its S&P 500 Index benchmark, stronger outperformance is rewarded with a larger management fee while weaker underperformance is penalized with a smaller management fee. The CWS fulcrum fee was 0.69% during November 2018. After the Fund’s November performance, the CWS fulcrum fee will adjust to 0.75% in December 2018.

 

Respectfully,

Eddy Elfenbein
Crossing Wall Street
AdvisorShares Focused Equity ETF (CWS) Portfolio Manager

Definitions:

The S&P 500 Index is a broad-based, unmanaged measurement of changes in stock market conditions based on the average of 500 widely held common stocks. One cannot invest directly in an index.

EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA is often used as an indicator of a company’s financial performance and as a proxy for the earning potential of a business.


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There is no guarantee that the Fund will achieve its investment objective. An investment in the Fund is subject to risk, including the possible loss of principal amount invested. The prices of equity securities rise and fall daily. These price movements may result from factors affecting individual issuers, industries or the stock market as a whole. Shares of the Fund may trade above or below their net asset value (“NAV”). The trading price of the Fund’s shares may deviate significantly from their NAV during periods of market volatility. There can be no assurance that an active trading market for the Fund’s shares will develop or be maintained. In addition, equity markets tend to move in cycles which may cause stock prices to fall over short or extended periods of time. Other Fund risks include market risk, liquidity risk, large cap, mid cap, and small cap risk. Please see prospectus for details regarding risk.

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The views in this commentary are those of the portfolio manager and may not reflect his views on the date this material is distributed or anytime thereafter. These views are intended to assist shareholders in understanding their investments and do not constitute investment advice.